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Ilija Batljan’s Rating Shopping Spree

Repairs

Are upgrades driven by improvements in creditworthiness or by hopping from agency to agency?

The activities of self-made millionaire Ilija Batljan are too conspicuous to be ignored in the financial markets. Ilija Batljan came to Sweden from Montenegro. He moved to Sweden in 1993 during the breakup of his native Yugoslavia and in 1996 earned a B.A. in economics at Stockholm University, later disputing in 2007. A man with a migration background, Ilija Batljan quickly made a career in politics and became mayor of Nynäshamn in 2005 and campaigned against wealth and property taxes in his Social Democratic Party of Sweden in 2010.

There is now a long list of companies in which he plays or played the role of investor, Chairman, Chief Executive Officer and/or Director:

However, the long list of mandates and investments does not suggest diversified assets and balanced risk positions. Some of the mandates are subsidiaries or small companies. His largest investments is reportedly Samhällsbyggnadsbolaget i Norden AB (SBB). According to the shareholder structure as of March 31, 2021, Ilija Batljan held (private and through company) 8.46 % of share capital and 32.54 % of votes in SBB.

Moody’s Single B Credit Rating Category

Anyone looking for information from the internally recognized credit rating agency Moody’s Investors Service on the high debts of Ilija Batljan’s numerous companies will have to go back years in their research. Moody’s Investors Service had on November 8, 2017 assigned a first-time B1(Single B One) corporate family rating to Samhällsbyggnadsbolaget i Norden AB (SBB), a Stockholm-based real estate company. controlled by CEO and founder Ph.D. Ilija Batljan. The outlook on the rating was Stable. According to Moody’s rating scale, obligations rated B (Single B) “are considered speculative and are subject to high credit risk“. Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa.

At the time and according to Daniel Harlid, a Moody’s Assistant Vice President, Analyst and also Lead Analyst for SBB, the B1 (Single B One) rating reflected the company’s midsized property portfolio of low risk community services and residential properties in Sweden and Norway, reflecting the company’s focus on rental income from regulated markets or activities that are, in one way or another, funded by the government.

On November 8, 2017 the B1 (Single B One) corporate family rating assigned to SBB reflected all the company’s strenghts (see Moody’s):

  • high share of low-risk revenue derived from residential properties in Sweden, community service properties, as well as offices in Sweden and Norway;
  • high share of revenue generated from public tenants (over 30%);
  • diversified tenant base and property portfolio, with almost full occupancy;
  • long lease maturity profile, with an average lease length of seven years;
  • good deal-sourcing capabilities, leading to a medium-sized portfolio of SEK 22.1 billion as of the third quarter of 2017, only after 20 months since the creation of SBB; and
  • expected positive free cash flow, which will fund capital spending.

Despite all these favorable factors, it was only enough for a B1 (Single B One) rating, since the credit rating also reflected a number of challenges such as a low unencumbered asset ratio, properties located in small cities and in less liquid real estate markets than in the metropolitan area and elevated leveraged.

On April 10, 2019 Moody’s had withdrawn the corporate family rating of SBB. At the time of the of withdrawal the rating was still B1 (Single B One) and had a positive outlook. Moody’s had decided to withdraw the rating for its own business reasons: “Please refer to the Moody’s Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.” Ultimately, it remains in the dark what would have happened to the rating and the outlook if Moody’s had continued to assess the company. The rating history has ended.

Credit Rating Agency (CRA) - Definition of "Rating Shopping"

“Rating shopping can be understood as occurring when an issuer engages with a number of credit rating agencies with a view to selecting only those credit rating agencies that will provide the most favourable assessment for the entity or debt instrument. In choosing to appoint only those credit rating agencies that provide the most favourable assessment, risks are created for investor protection and financial stability. Specifically, risks of ratings inflation and lack of applied methodological rigour. While concerns around this practice were initially focused on structured finance ratings, recent revisions of the CRA Regulation have expanded the area of focus to the broader spectrum of entities and debt instruments assessed by CRAs.”

Source: Consultation Paper - Guidelines on Disclosure Requirements for Initial Reviews and Preliminary Ratings, European Securities and Markets Authority, May 26, 2021, ESMA33-9-412, p. 5.

S&P Global Ratings’ Triple B Rating Category

On January 15, 2018, S&P Global Ratings had SBB assigned a BB (Double B) rating with stable outlook. This was SBB’s second public rating from a leading credit rating agency and was a two step improvement over the first rating the company received in November 2017 from Moody’s.

On April 26, 2019, S&P Global Ratings announced that SBB had been assigned a BBB- (Triple B Minus) rating with stable outlook. This upgrade came after a competitor of S&P Global came into play, namely Fitch Ratings with its BB+ (Double B Plus), which superseded Moody’s B1 (Single B One).

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On May 5, 2020, SBB reported that SBB had been informed by the Swedish Economic Crime Authority that the company’s CEO Ilija Batljan had been detained in custody on alleged violation of the Market Abuse Regulation. The company had no additional information at this stage and did not know which company or security these allegations relate to. During Ilija Batljan’s absence, SBB’s deputy CEO Krister Karlsson was acting CEO for SBB.

Although SBB had been informed that the company’s CEO had been released from custody, the credit rating agency S&P Global announced on May 8, 2020, that they were placing SBB on Credit Watch Negative due to ”at this stage, there are some uncertainties about how” the charges against the CEO ”will affect SBB’s management and operations, including deleveraging plans which may take longer than S&P previously anticipated”.

On June 10, 2020, S&P Global Ratings affirmed SBB’s “investment grade” rating BBB- (Triple B Minus) with stable outlook and removed SBB from Credit Watch Negative. That means that SBB’s new rating was from that day on BBB- (Triple B Minus) with stable outlook for ratings on the company and its senior unsecured debt.

“Thanks to SBB’s focus on deleveraging, despite its strategy to continue to expand its portfolio, we expect the company will maintain or improve its credit metrics over 2021-2022”, wrote S&P Global Ratings on March 1, 2021. “We are therefore revising our outlook on SBB to positive from stable and affirming our ‘BBB-‘ (Triple B Minus) issuer credit rating on the company. We are also affirming our ‘BBB-‘ (Triple B Minus) ratings on the senior unsecured debt and ‘BB’ (Double B) rating on the subordinated hybrid instruments.”

Fitch Ratings’ Triple B Rating Category

On May 30, 2018, there was better news for SBB, namely from Fitch Ratings by its “Long Term Issuer Default Rating”: SBB had now been rated BB (Double B) by these analysts. On April 8, 2019, there was an upgrade to BB+ (Double B Plus). A little later it went up to BBB- (Triple B Minus) on April 16, 2019. It stayed that way to this day. The credit rating for the debt level “subordinated” remained at BB (Double B).

The close temporal relationship between the end of Moody’s rating and the upgrade by Fitch Ratings is striking. It was only on April 8, 2019 that Fitch ratings upgraded to BB+ (Double B Plus), two days later Moody’s removed its rating for the company. That was good business for SBB, because according to the EU regulation on credit rating agencies and due to the recognition of Fitch Ratings, the rating of this agency has about the same legal significance as that of Moody’s.

Scope Ratings’ Triple B Rating Category

Although Ilija Batljan already had relationships with Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, his choice for the credit rating of his investment company “Ilija Batljan Invest AB” falls on another, less well-known rating agency in Germany: There is a local credit rating agency in Berlin.

That credit rating agency currently operates under the name “Scope Ratings GmbH”, maintains a website on the Internet and presents itself as “the leading European provider of independent credit ratings” though with a market share of less than 1%.

The European Securities and Markets Authority (ESMA) imposed sanctions on this agency, but it is a legally registered agency according to the EU regulation on credit rating agencies. According to the regulation, the ratings of this agency thus have practically the same legal meanings as the ones of the internationally recognized credit rating agencies. In contrast to the credit ratings by the leading agencies, the ratings of “Scope Ratings” are not used by the European Central Bank for specific purposes, but – according to the rating agency’s own company news – by the central bank in Sweden, Sveriges Riksbank.

According to the decision by the Executive Board, the Riksbank may purchase bonds issued in Swedish krona by Swedish non-financial corporations. This process of money creation brings significant advantages for the privileged companies. SBB is already one of these companies.

The bonds the Riksbank may purchase must have, among other requirements, credit ratings no lower than Baa3 (Baa Three) or BBB- (Triple B Minus), from anyone of the credit rating institutes Standard & Poor’s, Moody’s, Fitch Ratings, Nordic Credit Rating or Scope Ratings, or if they have no such rating, be issued by companies with credit ratings no less than Baa3 (Baa Three) or BBB- (Triple B Minus) from the same credit rating institutes.

On May 28, 2021 Scope Ratings has assigned a first-time issuer rating of BBB- (Triple B Minus) to Ilija Batljan Invest AB. Scope Ratings has also assigned a first-time rating of BBB- (Triple B Minus) to the company’s senior unsecured debt. Even before the crisis, the Ilija Batljan Invest AB (IB Invest) reported losses, as shown in the published financial statements up to 2019. More recent figures are not yet reported here.

Ilija Batljan Invest AB’s cash flows are from recurring income from its core holding SBB i Norden and direct/indirect real estate investments. “The majority of IB Invest’s financially relevant holdings (87% of gross asset value and 78% income contribution) are publicly listed companies in well-developed markets”, says Scope Ratings GmbH in its report named “Scope assigns first-time rating of BBB-/Stable to Ilija Batljan Invest AB” and continues: “The remainder are either direct or indirect real estate holdings with decent assessed liquidity or unlisted shares in growth companies.” Scope Ratings GmbH acknowledges that the “business risk profile is somewhat held back by its limited diversification“.

Provided that the factual information from the Berlin rating agency is correct, the rating result of the Berliners is surprising against the background of the above ratings from the other agencies. Ilija Batljan Invest AB’s creditors can only be satisfied from the cash flows that the company receives from its assets. These assets mainly include the investment in SBB. However, if SBB’s subordinated liabilities are only to be found in category BB (Double B), then the payments to SBB’s shareholders must be exposed to even greater risks because they are subordinate to SBB’s creditors. The shareholders only receive residual income.

As Scope Ratings itself shows, the portfolio of Ilija Batljan Invest AB is concentrated on comparatively few exposures, which account for the largest part of the risk. Therefore, the positive diversification effects cannot be great. It is questionable whether the income from the other commitments would be sufficient to hold Ilija Batljan Invest AB’s creditors harmless in the event of a failure by SBB. Investors must therefore check whether the rating issued by Scope Ratings does not need to be repaired.

On May 17, 2021 Ilija Batljan Invest AB was requesting the approval from holders of its up to SEK 1,000,000,000 Senior Unsecured Floating Rate Notes due 2022 (ISIN: SE0013122009) to refinance the Notes in full before the Maturity Date. In order to refinance the Notes in full before the maturity date for the purpose of managing the Company’s debt maturity profile by way of adding a call option at 104.00 per cent of the nominal amount, the Company had instructed the agent, Nordic Trustee & Agency AB, to initiate a written procedure for its outstanding Notes. Not necessarily, but possibly: Such a negotiation process can also be an expression of a liquidity bottleneck or an impending insolvency, among other things.

It was the declared intention of the Ilija Batljan Invest AB "to evaluate an acquisition of a corporate rating from Scope (or similar rating agency) with a clear ambition to reach Investment Grade and to list any new Market Loan(s) issued on Nasdaq Stockholm". 

This is not just an internal announcement. Rather, the intentions were made public. It must therefore have been clear to every analyst at Scope Ratings which expectations of the issuer they have to meet. If they did not give an "investment grade" rating, the contract would go to another agency. However, since the Scope Group has never made a profit for almost two decades and the agency's analysts probably believe that the agency must break even if possible, the credit analysts are under great pressure. In addition, the analysts at Scope Ratings must have been aware that the growing circle of profit-seeking shareholders in Scope SE & Co. KGaA has developed ever higher expectations with regard to the agency's expected profits over the years.

Under the outlined conditions, it seems plausible that the cash flows to be expected from Ilija Batljan Invest AB cannot be rated at the same level as those of SBB, from which these cash flows are obtained, although in addition to those from other, smaller investments. Rather, it stands to reason that the same cash flows are leveraged multiple times here: At the level of subsidiaries and parent companies as well as at the level of the investment vehicle Ilija Batljan Invest AB. With every additional leverage and additional debt, the risk might increase, especially if there are no profits that could be distributed or transferred to reserves.

Furthermore, the question should be investigated whether the change of credit rating agencies and the rating order to a lesser-known, local rating agency from Berlin arose from the will to provide more transparency for creditors, or from the greed for better ratings for an even higher level of debt. The question of why a local rating agency on the Stockholm doorstep, namely Nordic Credit Rating, was not commissioned, which could know the Ilija Batljan’s group of companies even better, can also be investigated. Nordic Credit Rating would also have met the central bank’s requirements, Riksbank’s formal criteria.

While it became known for Greensill Bank that the chairman of the Greensill Bank‘s supervisory board was also an investor and advisory board member at the local agency in Berlin and that it helped Lex Greensill to get and maintain even an A- (Single A Minus) rating until six months before insolvency of his bank, it is not known whether Iljia Batljan is also involved in that same credit rating agency. Because of the multi-level business model of the Scope Group and the intransparent shareholder structure of Scope SE & Co. KGaA it is not known who is shareholder and at the same time beneficiary of a benevolent credit rating of the rating agency. In any case, it is known that the agency has tried to collect money through numerous road shows not only in Berlin, but also in other cities.

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